Governance Metrics and Reporting
The Governance Pillar
Governance factors address how a company is directed and controlled. Strong governance creates the foundation for effective management of environmental and social issues, making it central to overall ESG performance.
Board Structure and Composition
Board Independence
Independent directors: Percentage of board members who are independent
Definition of independence: No material relationships with the company
Independent chair: Whether the board chair is independent from management
Lead independent director: If chair is not independent, existence of lead independent director
Board Diversity
Gender diversity: Percentage of women on board
Ethnic/racial diversity: Diversity of board members (where reporting is permitted)
Skills diversity: Mix of backgrounds, expertise, and experience
Age diversity: Range of ages represented
International experience: Directors with global experience
Board Committees
Audit committee: Independence, financial expertise, meeting frequency
Compensation committee: Independence, structure
Nominating/governance committee: Independence, director selection process
Risk committee: Oversight of enterprise risk
Sustainability/ESG committee: Dedicated oversight of sustainability matters
Board Effectiveness
Meeting attendance: Director attendance at board and committee meetings
Board evaluations: Regular assessment of board effectiveness
Director education: Ongoing training and development
Term limits and refreshment: Policies ensuring board renewal
Executive Compensation
Pay Structure
Components: Base salary, bonus, long-term incentives, benefits
Performance metrics: Criteria determining variable pay
Pay mix: Proportion of fixed vs. variable compensation
Time horizon: Short-term vs. long-term incentive emphasis
ESG in Compensation
ESG metrics in incentives: Whether ESG performance affects executive pay
Specific ESG targets: What ESG metrics are tied to compensation
Weighting: How significant ESG is in overall compensation determination
Pay Governance
Say on pay: Shareholder advisory votes on executive compensation
Clawback policies: Ability to reclaim compensation in certain circumstances
Stock ownership requirements: Minimum shareholding for executives
Hedging/pledging policies: Restrictions on executive share transactions
Pay Ratios
CEO pay ratio: CEO total compensation to median employee compensation
Pay gap analysis: Executive pay relative to workforce
Shareholder Rights
Voting Rights
One share, one vote: Equal voting rights for all shareholders
Dual-class structures: Existence of shares with enhanced voting rights
Majority voting: Requirements for director elections
Proxy access: Shareholder ability to nominate directors
Shareholder Engagement
Engagement practices: How company engages with shareholders
Response to feedback: Actions taken based on shareholder input
Shareholder proposals: Number received, responses, outcomes
Takeover Defenses
Poison pills: Existence and terms of shareholder rights plans
Staggered boards: Whether directors serve staggered terms
Supermajority requirements: Thresholds for certain corporate actions
Ethics and Business Conduct
Ethics Framework
Code of ethics: Existence, scope, and accessibility
Training: Ethics training coverage and frequency
Reporting mechanisms: Hotlines, whistleblower policies
Investigation process: How ethics concerns are addressed
Anti-Corruption
Anti-bribery policies: Prohibition of bribery and corruption
Third-party due diligence: Assessment of business partners
Political contributions: Policies and disclosure
Lobbying: Disclosure of lobbying activities and expenditures
Tax Transparency
Tax policy: Approach to tax planning
Country-by-country reporting: Tax paid by jurisdiction
Tax governance: Board oversight of tax matters
Risk Management
Risk Governance
Board risk oversight: How board oversees enterprise risks
Risk committee: Dedicated committee or full board responsibility
Management risk function: Chief Risk Officer, risk management structure
Risk Processes
Risk identification: How risks are identified
Risk assessment: Methodology for evaluating risks
Risk mitigation: Actions to address identified risks
Risk monitoring: Ongoing tracking of risk exposure
ESG Risk Integration
Climate risk: Integration of climate risks into enterprise risk management
Social risks: Assessment of human capital, supply chain, reputational risks
Emerging risks: Process for identifying new and evolving risks
Sustainability Governance
Board-Level Oversight
Sustainability committee: Dedicated board committee for ESG
Full board review: How often full board reviews sustainability
Director expertise: ESG expertise among board members
Management Responsibility
Executive accountability: Who is responsible for sustainability at C-suite level
Sustainability organization: Structure of sustainability function
Cross-functional integration: How sustainability connects with other functions
Incentive Alignment
ESG in executive compensation: Linking pay to ESG performance
Management KPIs: ESG metrics in management objectives
Organizational incentives: How ESG factors into broader performance management
Transparency and Disclosure
Financial Reporting
Audit quality: Auditor independence, tenure, fees
Internal controls: Effectiveness of internal financial controls
Restatements: History of financial restatements
Non-Financial Reporting
ESG disclosure: Comprehensiveness of sustainability reporting
Reporting frameworks: Adherence to established standards
Assurance: External verification of non-financial information
Communication
Stakeholder engagement: How company communicates with stakeholders
Disclosure timeliness: Promptness of material information disclosure
Accessibility: How accessible information is to stakeholders
Governance Reporting Best Practices
Structure the Narrative
Governance reporting should tell a coherent story:
- How governance supports strategy
- How governance has evolved
- How governance addresses stakeholder expectations
Quantify Where Possible
- Board composition statistics
- Meeting attendance percentages
- Compensation metrics
- Ethics training completion rates
Provide Policy Access
- Make governance policies publicly accessible
- Include links in reports
- Update regularly
Explain Changes
- Note governance changes year-over-year
- Explain rationale for changes
- Connect to stakeholder feedback
Benchmark
- Compare governance practices to peers
- Reference governance codes and best practices
- Address areas of divergence
Governance Assessment and Ratings
Proxy Advisors
ISS and Glass Lewis assess governance and make voting recommendations:
- Board structure and independence
- Executive compensation
- Shareholder rights
- ESG oversight
ESG Ratings Agencies
Governance factors significantly influence ESG ratings:
- Board composition and independence
- Ethics and anti-corruption
- Risk management
- Disclosure quality
Key Takeaways
- Governance provides the foundation for effective ESG management
- Board structure includes independence, diversity, committees, and effectiveness
- Executive compensation increasingly includes ESG metrics
- Shareholder rights cover voting, engagement, and takeover provisions
- Ethics frameworks include codes, training, reporting mechanisms, and anti-corruption
- Risk management should integrate ESG risks
- Sustainability governance includes board oversight, management accountability, and incentive alignment
- Transparency and disclosure quality affect stakeholder trust
Next Module
Module 6 covers materiality assessment—the process of identifying which ESG topics matter most for your organization and stakeholders.